Moss Bross (MOSB.L) – Merger Arbitrage – 10% Upside

Current Price: £0.20

Offer Price: £0.22

Upside: 10%

Expected Closing: Q2 2020

Scheme document

 

Liquidity is limited.

This is a potentially profitable arbitrage situation as well as an interesting case study where the buyer’s attempt to drop the merger was rejected by the regulators. Although termination risk still remains, it was significantly reduced by the recent Takeover Panel decision. Shareholder approval has already been received and all other key conditions for the merger have been satisfied.

Timeline:

• 12th of Mar. UK based mens clothing retailer Moss Bros signed merger agreement with Brigadier (acquisition vehicle controlled by Menoshi Shina – owner of another clothing retailer Crew Clothing). Consideration for MOSB was agreed at £0.22/share (£22.6m in total).
• 22nd of Apr. Brigadier announced intentions to terminate the merger. MOSB argued that according to UK law the buyer doesn’t have sufficient ground to drop the transaction and both companies started a dialog with the takeover panel.
• 29th of Apr. MOSB shareholders approved the offer.
• 19th of May. Takeover Panel announced that after all Brigadier will not be allowed to walk away from the transaction:

Brigadier has not established that the circumstances which give rise to its right to invoke the relevant conditions are of material significance to it in the context of its offer as required by Rule 13.5(a) of the Takeover Code and, therefore, that Brigadier should not be permitted to invoke any of the Relevant Conditions at this time.

No comments were made yet by the buyer.

So, in case the transaction closes successfully (expected in Q2’20), 10% upside could be realized.

However, if the buyer somehow manages to wiggle out of the merger, the downside is very significant as retailers have been severely impacted by COVID and MOSB stores will only start opening in June. FTSE retail index currently trades at the same level as on the 11th of March (pre-announcement date for MOSB). Thus, if the merger breaks, MOSB could easily fall back to that level (£0.13/share) or below, resulting in loss of 30%+ or more.

The chances of merger breaking are not exactly clear at the moment. The buyer could try to appeal the Panel executive’s decision to the Hearings Committee, however it seems quite unlikely that the ruling will be reversed. The UK merger termination law is quite vague and does not provide much detail. Rule 13.5(a) states:

An offeror should not invoke any condition … so as to cause the offer not to proceed, to lapse or to be withdrawn unless the circumstances which give rise to invoke the condition … are of material significance to the offeror in the context of the offer.

Meeting this test requires an adverse change of very considerable significance striking at the heart of the purpose of the transaction in question, analogous … to something that would justify frustration of a legal contract”.

 

Moss Bros

The company retails and hires formal-wear and fashion products for men in UK, with retail sales comprising 89%, and hire – 11% of total sales. The company has 127 stores, operates without debt and has also recently stated that it, “has sufficient cash resources to continue trading through the second half of FY21 and beyond”.